Wednesday, June 01, 2011

Falling House Prices and Jobs, Jobs, Jobs

Yes, the decline in house prices continues. The Case-Shiller index of house prices for March 2011 was released yesterday, and confirmed that prices in many major markets in the US continue to fall. The average of house price indexes for the 20 largest cities in the US looks like this:

There is some variation in how local markets are doing, however. A few cities like Washington DC and Boston have seen house prices increase a bit over the past year, while in others the decline in prices continues as a rapid rate. Part of the explanation is that there are differences in how local and regional economies are doing.

The table at right compares the change in house prices against the local unemployment rate for a group of major US cities. In general, cities with lower unemployment rates in 2010 tended to have better-performing housing markets. A notable exception to that general correlation are the cities in California; for some reason, despite very high unemployment in California, housing prices seem to have remained roughly stable there in 2010. But overall, it's not at all surprising that regions and cities that had better job markets in 2010 tended to also have better real estate markets.

It's worth remembering that the bear market in houses probably still has a few years left to go. The real estate market is notoriously cyclical, and those cycles typically seem to be around 14 to 18 years long from peak to peak in the US. During the last bear market in residential real estate during the 1990s, it took about 8 or 9 years for prices to bottom out, as illustrated by this chart:

So based on historical experience, it will probably be another 3 to 5 years before house prices begin to pick up in a meaningful way in the US. But if we could get stronger economic growth and reductions in unemployment in the US, that would surely help to prevent further price declines in real estate. And that in turn would help to wind down the vicious cycle of underwater mortgages, foreclosures, and continued declines in house prices. It's yet another reason that the focus of policy-makers should be on jobs, jobs, jobs.

Contact

The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)